U.S. Issues Charges in First Criminal Cryptocurrency Sanctions Case

The Justice Department has launched its first criminal prosecution involving the alleged use of cryptocurrency to evade U.S. economic sanctions, a federal judge disclosed Friday.

In an unusual nine-page opinion, U.S. Magistrate Judge Zia M. Faruqui of Washington, D.C., explained why he approved a Justice Department criminal complaint against an American citizen accused of transmitting more than $10 million worth of bitcoin to a virtual currency exchange in one of a handful of countries comprehensively sanctioned by the U.S. government: Cuba, Iran, North Korea, Syria or Russia.

In the ruling, the judge called cryptocurrency’s reputation for providing anonymity to users a myth. He added that while some legal experts argue that virtual moneys such as bitcoin, ethereum or Tether are not subject to U.S. sanctions laws because they are created and move outside the traditional financial system, recent action taken by the Treasury Department’s Office of Foreign Assets Control require federal courts to find otherwise.

“Issue One: virtual currency is untraceable? WRONG … Issue Two: sanctions do not apply to virtual currency? WRONG,” Faruqui wrote, adopting and crediting the staccato-delivery style of the late American political commentator John McLaughlin and his long-running television program, “The McLaughlin Group.”

“The Department of Justice can and will criminally prosecute individuals and entities for failure to comply with OFAC’s regulations, including as to virtual currency,” Faruqui said.

In the opinion, Faruqui wrote that he adopted guidance issued in October by OFAC, which stated that sanctions regulations apply equally to transactions involving virtual currencies as those involving the U.S. dollar or other traditional fiat currencies.

The defendant was not named in the opinion and the underlying case remains sealed — as often happens in an ongoing investigation — after the court, in consultation with prosecutors, withheld information that would identify the subject or witnesses.

Nevertheless, the prosecution represents a new U.S. criminal sanctions enforcement push targeting cryptocurrency transactions at a time of rising concern over the extent to which illicit actors can use or are using such methods to launder money or do business with countries the United States has cut off from the dollar, the lifeblood of international finance.

In March, Attorney General Merrick Garland said a law enforcement task force responding to Russia’s invasion of Ukraine would be “targeting efforts to use cryptocurrency to evade U.S. sanctions,” among other things. Earlier this year, the Justice Department also announced its largest virtual currency seizure after arresting a New York couple accused of trying to launder $3.6 billion in stolen bitcoin.

The Treasury Department this month imposed its first sanctions against a cryptocurrency “mixer” that allegedly helped obscure the source of hacked funds including those by a North Korean government-linked network, the Lazarus Group, which has been accused of stealing an estimated $1.75 billion in cryptocurrency to support that country’s illicit nuclear missile and weapons development program.

Ari Redbord, who served in 2019 and 2020 as a senior adviser to the Treasury Department’s undersecretary for terrorism and financial intelligence, called Friday’s case the first U.S. criminal prosecution targeting solely the use of cryptocurrency in a sanctions case. He said the ruling made clear such conduct is traceable and “immutable — in other words, transactions using cryptocurrency are forever.”

“What we are seeing is that the Department of Justice is going to actively go after actors that attempt to use cryptocurrency, but also that it is hard to use cryptocurrency to evade sanctions,” Redbord said. “It shows, in many respects, cryptocurrency is not a good tool for sanctions evasion or money laundering.”

U.S. authorities filed charges in March after allegedly discovering that a sanctioned country had set up a PayPal-type payment platform system with the defendants’ help, according to Friday’s ruling. It said investigators were able to use sophisticated blockchain analysis tools to trace that person’s actions, since despite cryptocurrencies’ anonymizing features, all transactions to individual accounts are recorded in public ledgers that can be amassed into large data sets.

The $10 million in bitcoin payments originated from the United States and were transmitted for customers of the payment platform, according to a U.S. law enforcement affidavit cited by the ruling. The platform advertised its services as designed to evade American sanctions, and the defendant “proudly stated” it could do so using bitcoins while knowing the country was blacklisted, the ruling said.

The opinion stated that investigators were able to follow “the (virtual) money” and identify their target using synthesized subpoena returns from a U.S.- and a foreign-based virtual currency exchange — such as Binance or Coinbase — that were used by the defendant, as well as banking information from a traditional U.S. financial institution the suspect used to fund the first exchange with them. Investigators also used email search warrant returns and shell company registration information.

Specifically, the defendant used an Internet address in the United States to conspire to operate the payment and remittance system, which involved establishing a U.S.-based front company to help buy domains, using U.S. financial accounts to help it and its customers, and sending bitcoin to its associated accounts, the court said.

It helped that both U.S. entities collected legally required “know your customer” information identifying the defendant. Both exchanges also were accessed from Internet addresses traced to the defendant’s home, and two accounts receiving the overseas exchange were accessed from an Internet address in the sanctioned country, sometimes within minutes, according to the ruling.

Faruqui concluded there was probable cause to believe the defendant’s transmission of virtual currency to the sanctioned country violated U.S. law, and that the person faces liability for causing the two exchanges to violate sanctions, even if perhaps unwittingly. The foreign exchange became subject to U.S. regulations when it knowingly “reexported financial services — including virtual currency that originated in the U.S. or came from a U.S. person” to a forbidden recipient, the court found.

Article credit: https://www.washingtonpost.com/dc-md-va/2022/05/16/first-us-criminal-cryptocurrency-sanctions/